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Spitzer: Man Of The Year – Savior of Capitalism?

Landmark ruling changes everything

Analysis The guy's got balls, for sure.

In November, New York state's Attorney General Eliot Spitzer walked into the lion's den: a self-congratulatory dinner ceremony in which Wall Street's financial analysts were awarding each other for their performance over the year, and gave an astonishing speech:-

"I don't agree with [deregulation advocate] Lewis and others that the product of your labors is useless. At least it doesn't have to be," he said [full text is a must-read].

Spitzer pointed out that the performance of Wall Street's "all-stars" he was addressing compared unfavorably with that of the proverbial chimp. The public's faith in the financial markets had disappeared, he told them, and wouldn't be restored until some transparency was evident in the banks and brokerages.

Using a New York state law, he obtained some explosive internal emails from Merrill Lynch and secured a $100m fine. This pushed a complacent Securities and Exchange Commission into action, and finally yesterday Spitzer got the reward for his pursuit.

As part of the agreement forged with the Stock Exchange [full details], the ten leading brokerages must pay $900 million in retrospective relief, $450m to fund "independent" research and $85 million to "investor education". The brokerages, including Solomon Smith and Barney, CSFB, Lehman, Morgan Stanley and UBS Warburg, will not be allowed to reward CEOs with early placements from IPOs, and must operate at arms length from no less than independent analysts on each offering. (Since the brokers are still paying these independent analysts' fees, it's hard to see how this cure will be truly effective.)

But for the Bronx-born Spitzer, his legend is assured as a pugilist populist attorney straight from central casting. He's taken on the mob, the music pigopolists (for CD price fixing), low-paying employers, and is currently suing President Bush for gutting the clean air act.

Although he was one of several state attorneys to comply with the Microsoft Seattlement, he took on Network Associates because its End User License Agreement (EULA) requires a reviewer to beg the company's permission before writing a review and forbids benchmarks or comparisons with rival products[report].

Spitzer's incredible achievement can't be overstated.

Of course, it marks the very end of the era. But the real significance of this ritual humiliation of our leading finance capitalists - and what a pleasure it is to see these overpaid emblems of mediocrity squirm - is deeper and much more far reaching. And everyone, from industrialists who'd shoot a leftie straying across their golf course, to progressives ought to be celebrating.

Why? He's saving capitalism...
Far from seeing his investigation of Merrill Lynch as an assault on the firm, Spitzer saw it as a way to save Merrill from itself, since investors who repeatedly get bad information will eventually lose confidence in the market and stop providing capital to businesses altogether. This is a point Spitzer stresses repeatedly. In our interview, he used the phrase "capital formation" at least four times--as in, "ensuring that the investment banks continue their function of facilitating capital formation," and, "This is an effort to improve upon the capital-formation structure to see that it works." [New Republic profile]

Three terrible things - but orthogonally, they're all related - have happened in the last twenty years as the consequence of the triumphalist march of finance capital.

Governments have adjusted their policies to remove any elements that might be frowned upon by the capital markets, leaving us with ciphers such as Clinton and Blair. That has had the effect of disemboweling the political discourse, leaving most "serious" parties looking almost identical, or least identical in their lack of ambition. It has also punished well run and successful businesses and start-ups alike, who are at the caprice of this hasty and indiscriminate mob. (Here, we compared it to Thai prison executions.) Finance capital simply doesn't serve business very well anymore.

In fact, it's been the ruination of many a good business. One of the few remaining start-ups in the Valley (don't ask, and don't Google - there's nothing public) that I know recently had to lay off a substantial number of staff despite having perhaps the most astonishing single-box computer I've ever seen and some Fortune 100 customers to buy the box - because the VC had got bored with idea. Britain's technology industry has been emasculated by short-term finance capital to the point where it may be able to claim the world's most popular CPU (ARM) and in time perhaps the world's most popular operating system (SymbianOS) but won't have a single domestic manufacturer who can ship a device with either, let alone both. What kind of reward is that?

Now it's no secret that the intellectual caliber of many of these analysts does not reflect what we like to think of as our best and brightest. Although several investment analysts with whom we have a dialog are very clever people, and from these friends we learn much, the majority - as any conference call will demonstrate - show neither rationality nor a long-term understanding of the business in which they're supposed to be experts. And some are such jackasses that we've come to rely on them as a kind of reverse barometer. If they recommend something, it's probably trash. If they boost a stock, it's probably a (to paraphrase Merrill Lynch) "piece of shit".

But most fundamentally of all, and in a very greedy landgrab, the markets have claimed sovereignty over the polity, to the extent that they seek govern the dynamic of society in which we live. It's been no different from any other power grab by a tiny junta, but you have to admire their chutzpah.

We are the revolutionaries. Go home

First they go for the language of change itself. When's the last time you heard some tech nonentity claim that something was "revolutionary"? It was probably only a couple of hours ago. But market populism allowed all kinds of staid combines and fringe nuts to claim the language of "revolution" and as Thomas Frank exhaustively documented, this became a hallmark of the bubble economy era. The first thing that an elite does, Frank notes, is claim that they're populist and that everyone else is being elitist by objecting to them. Towards the end of the bubble economy, an investment firm was running billboard ads in which a muscled don't-argue proletarian biscep was tattooed with the image of Alan Greenspan.

Now need we remind you who's supposed to be in charge here? We are.

We've had twenty years where trust and faith in the capital markets governed everything we do, and that day may be over. Or at least, Spitzer has demonstrated an important fundamental: that we shape society to our will, and not to some magical, all-healing invisible hand. Especially when that invisible hand stays in its invisible trouser pocket, jacking off.

"So they pay $1.5b + carry on scamming. They're OK. Carry on scamming" - a good friend emailed me last night. Well, that's possible, and that's what they're hoping for if we carry on with business as usual.

I don't think it's business as usual, or Spitzer has even nibbled at the problem of capital formation. But he has achieved something that the left couldn't in twenty years, and it's an indication of who owns society, them or us? Let's get onto that, with your input, we hope. ®

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